As the name suggests, a car title loan is a short-term loan offered to borrowers with the car’s title used as security. This means that the borrower is required to temporarily surrender his car title in order to acquire the loan and a lien is put on the title. After the repayment of the loan, the lender removes the lien from the title and gives back the borrower the car title. However, in case the borrower fails to repay the loan the lender repossesses the vehicle and sells it in order to recover the money lent. The loan normally earns a high interest rate since it is a short-term loan.
Title loans are an old practice that can be dated back in the early 1990’s when it was used to help people with bad credit to acquire loans fast. Today, the practice is still common however in many states, you also hear the terms title pawn loan or auto pawn loan. The business is a good deal since on transaction, the lender receives more cash and in case of failure he has both the title and the vehicle so he has the chance to repossess it.
Simple Process, Minimal Paperwork
The borrower will seek the lender’s services either at their store location or online. He will then prove his possession of the car by producing other identification documents that should match the information in the car title. Documents such as an ID issued by the government, driver’s license, a lien-free car title and proof of income and insurance are all necessary documents which should be submitted. Compared to applying for a personal loan, or other type of traditional financing, this process is quite easy and requires little paperwork.
Normally, the title loan lenders and auto pawn lenders offer up to half resale value and in some cases, they are willing to go higher. In determining the resale value of the vehicle, lenders use the method of Kelley Blue Book. The title loan as mentioned above requires lenders to remain with the car title. This means that the vehicle should not have outstanding costs or liens. The interest rate of the loans is normally higher than a traditional bank loan, but lower than that of other types of bad credit loans. However, the interest rate charges depend on the country one is from. At the end of the loan term, it is necessary that the borrower has the full amount at hand. Otherwise his vehicle will be repossessed by the lender and sold out.
Who Would Use a Title Loan?
In the past, title loans were only sought by people who were considered “poor”. However, today this is not the case as many people looking for a car title loan makes more than $75,000 a year. In all states in which title loans are legal, they are convenient, short-term loans that anyone with any credit can apply for.
Appropriate Use of Title Loans
Since the lenders do not check the borrower’s lending history, borrowers who have their names tarnished in lending institution due to huge loans and bankruptcy but need personal loans for people with bad credit can use this service. For example, a situation that would call for auto-title loans, is when a person who might have filed bankruptcy several years ago, is now stable wants to start a business; but cannot get traditional start up business loans due to the bankruptcy. Depending upon the vehicle this person has, he, or she, could get a considerable amount of money to start the business. There are many other scenarios like this in which a title loan would be appropriate and necessary.